Gold Price Outlook and Forecast

[Updated] Gold prices reached record levels following S&P’s sovereign credit downgrades and ongoing fears of Euro market/region instability. Coupled with volatility in global equity markets many investors and sovereign nations have rushed to invest in the yellow metal for protection and price speculation. Gold prices have surged 20 percent in 2011, building on 10 years of annual gains.

A number of analysts are predicting that ongoing global instability and slower economic growth could see gold prices reach $2,000 in the near term:

“In this current macro environment with high risk and uncertainty surrounding the financial markets, gold has boded very well,” said Bayram Dincer, an analyst at LGT Capital Management, to Bloomberg. “Gold is pricing in the one-notch downgrade as well as a component of lower global GDP growth.”

“There is heavy buying in gold because of the uncertainty surrounding the U.S. economy,” Matthew Zeman, a strategist at Kingsview Financial in Chicago, said in a phone interview. “For gold, the sky is the limit.”

“Look, the only place we’re going to get some yield is gold. Everything else scares the bejeezus out of me,” said Michael K. Smith, with T & K Futures and Options Inc. in Florida

In an note, Goldman Sachs foretasted that gold prices will continue to climb in 2011 and 2012 given the current low level of U.S. real interest rates. Their forecast for gold prices in 2012 is over $1800.

A falling US dollar is also likely to boost gold prices quoted in dollar terms.______________

[Update] The price of gold continues to reach new highs on account of uncertainty in global markets. Many market watchers believe gold in US dollars will remain strong while the current global economic uncertainty continues. That’s quite a reasonable expectation because economic uncertainty often translates into uncertainty about major currencies, with many investors viewing gold as an alternative currency.

Another factor driving gold is Chinese demand. China holds just 1.6 percent of its currency reserves in gold, compared to 70 percent by the U.S. and a 66 percent allocation by Germany, according to Credit Suisse. Given the Euro destabilization and already huge US dollar reserves, China may look to Gold as a way to hedge it’s foreign reserve holdings.

“There are no safe big-cap currencies,” wrote Andrew Garthwaite, Credit Suisse’s head of global equity strategy in a note to clients. “The real gold price is still 34 percent off its all time high and the behavior of gold is not yet typical of a bubble.”

Garthwaite, who sits on the firm’s global strategy team, recommended on CNBC that investors should be buying gold stocks like Newmont Mining (NEM), noting that if China and Japan were to put just 10 percent of their reserves in gold, the “increase in demand for gold would be 3 ½ times annual mine production.”

Is gold a good buy now?

Experts believe gold may continue to outperform equity markets in the near term due to the uncertainty in global equity markets and potential turmoil in the Middle East. However, retail investors looking to buy would be better off waiting till the Euro crisis stabilizes and the Indian/Chinese holiday wedding and festival season buying has passed (September/October). If you are interested in buying into the rise of gold, purchasing the stock of gold focused companies may be a better bet than the physical commodity itself. See the previous update below for ways to buy gold.

In any case, there are plenty of arguments underlying the overwhelmingly bullish outlook for gold in the near future. Given the current levels of global uncertainty – economic, political and otherwise – it is worthwhile to include Gold related assets in some form of hedge in your portfolio.

Gold at $5,000?

It sounds like a gold bug’s dream. But looking back to the last inflation-adjusted peak price in 1980, it’s far from impossible that the gold price could soon go above $5,000 an ounce. The potential level of a new high can be estimated in several ways. Based on consumer price inflation, the peak of $875 an ounce in 1980 is equivalent to about $2,300 today, almost twice the current gold price. But there’s a case for taking account of economic expansion as well as price inflation. The world’s economic output has increased about sixfold since 1980. Scale up the peak 30 years ago by that multiple, and the gold price could top out at around $5,300.

Of course, there is a considerable chance that gold and other commodity prices will peak at a lower level. But if a fourfold increase over a couple of years from today’s gold price to more than $5,000 an ounce seems impossibly extreme, that was the trajectory in 1978-80. If governments continue to print money, whether for economic stimulus or to stave off defaults by themselves or others, fear of widespread currency debasement and the consequent inflation could create the conditions for just such a spike. (Source : NY times/Reuters)

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When previously writing about where I would invest $50,000 in the year ahead, I had discounted gold as an investment because in essence it is a speculative commodity with little utilitarian purpose beyond that of jewelry. I may have been wrong as gold was one of the few “investments” that held up amid all the economic turmoil. But will the trend continue in 2009 and beyond?

In 2008, with markets and real estate collapsing around the world, gold on a per ounce basis posted a near 5% gain (the Dow was down by over 30% in comparison). If it wasn’t for the unexpected appreciation in the US dollar, as global investors flocked to the safety of US treasuries, gold could have performed even more strongly. So far this year, gold is up about 2% to around $900 an ounce. However, gold critics argue that it should have performed even better given the state of the local and global economies, while advocates of the yellow metal argue that the worst is still ahead of us and that the best gains for gold are still to come with $2,000 not beyond reach in 2009.Will Gold Shine going forward?

What might happen, no one knows. But for investors who want to hedge against potential economic turmoil, buying gold could be a good diversification plan in 2009. Like 2008, it may be one of the few asset classes that holds up at year end barring a miraculous economic recovery.

The case for gold is this: The government is injecting trillions of dollars into bailouts and stimulus plans, a purposefully inflationary policy aimed at reviving the economy and combating deflationary pressures. If inflation results, or if the dollar weakens as the supply of dollars necessarily increases under the stimulus plans, gold is a likely winner because it hedges against inflation. Increased investor interest, driven by the forecast depreciation of the U.S. dollar, low international interest rates and investor diversification in the face of a severe international economic slowdown are also likely to be supportive for the gold price

Fundamentally, gold prices also have support as well. Since about 2001, gold production has been declining – despite increasing prices. Basic economics tells us that as the price of a commodity goes up, supply should increase as companies seek to maximize profits. However, that hasn’t happened. The reasons behind this are that it’s getting harder and harder to find good gold deposits at prices which it is economically feasible to extract the metal.

The opposing view: Critics say that gold prices may have peaked in 2008 and that as the global economy recovers in 2009 investors and central banks will start selling gold to restore cash reserves. This will drive gold prices down to the low $200 levels seen earlier this decade. Further, the argument that inflationary pressures will drive gold prices up (as the US dollar weakens) seem to have lost merit in the current environment where inflation is no threat at all. Also, once the economy catches gear, the [Federal Reserve] will pull the money back out of the economy and sell shares of institution it assisted negating US dollar money over-supply concerns.

How to Buy or Invest in Gold

If you decide that gold prices are in fact on the way up, then your next decision is how to actually best invest in the commodity. These days investors have a variety of options to invest in the yellow metal, which include:

Bullion. This is the pure metal, typically cast as bars or coins in weights ranging from a single gram to one kilogram. Possessing gold in physical form offers some means of retaining control of your wealth in an economic disaster. However keeping bullion opens you to the threat of theft and the cost of keeping and insuring the physical asset can add up.

Pooled Accounts: These are sort of like a gold bank account in that your gold is held in a vault. The markup per ounce is usually less than 1% of gold’s current market price, making this cheaper than owning physical bullion. Depending on the provider, pooled accounts are either “allocated,” meaning that specific, numbered bars are allocated to you, or “unallocated,” meaning you’re assigned a sum of gold, though not specific bars. Allocated accounts charge annual storage and insurance fees. Unallocated accounts generally don’t, but you are an unsecured creditor meaning that if the firm goes bust, creditors can grab the company’s assets – including your gold.

Exchange-Traded Gold Funds: These trade like shares of stock on a stock exchange, with each share representing some fractional portion of an ounce of gold. For instance, each share of the SPDR Gold Shares ETF (GLD) represents 0.1 ounce, and thus trades at about a tenth the price of gold. The shares are typically backed by physical gold held in vaults in London, New York and Zurich and audited regularly. ETF’s offer a relatively cost-effective way to own gold, since you’re not paying insurance and storage costs. Nor do you take physical possession of the metal, so there are no fabrication costs or risk of loss or theft. Buying and selling are instantaneous like other ETF’s. From a taxation perspective, government treats gold as a collectible, and thus capital gains on a gold ETF are taxed at a flat 28%, nearly double the long-term capital-gains rates on stocks (a fact often overlooked by ETF investors!)

The most common and widely held Gold ETF’s are : SPDR Gold Trust ETF (GLD) & iShares Gold Trust ETF (IAU) & Market Vectors-Gold Miners ETF (GDX). For a detailed of review of these and other Funds and ETF’s go to funds review site Morningstar.

Individual Gold or Mining Companies : With publicly traded mining companies, you don’t own the metal but you do own the shares of companies that mine it. This is the most leveraged gold play, since a rising – or falling – gold price is spread across hundreds of thousands or millions of ounces the company has in the ground. Mark Johnson, portfolio manager for the USAA Precious Metals & Minerals Fund, estimates that “you probably have to put two times as much money into bullion or ETFs to get the same exposure to gold as you do with mining shares.” However, with any single company or stock, you are exposed to all sorts of corporate and geopolitical risks, based on the countries in which a particular gold miner operates. And because mining is so energy intensive, rising energy prices can negate some of the increase in gold prices. Some good gold stocks to check out: Yamana Gold (AUY), Barrack Gold (BRK), Agnico-Eagle Mines (AEM),GoldCorp (GG) and Gold Corporation (ABX).

In Conclusion

I am not as bearish on gold as I once was, but I still see it is a hedging strategy in case stock markets start to tumble, rather than a pure play, long term investment. Gold certainly has both technical and fundamental positives going for it thanks to loose monetary policies (leading to future inflation/currency pressures) of global central banks and limited new supply sources. Or even more simply, gold looks very attractive in 2009 for no other reason other than the year looks bad for everything else.

For the every day, nonprofessional investor (like me) the safest and most practical way to invest in Gold is via one of the ETF’s I mentioned above. They are low cost, yet provide good diversification. Like any trade though, do your own homework and pull the buy trigger only when you are comfortable with the merits of your investment.

Related

Over the next ten years or more, metal prices are expected to remain high. This is mostly due to increasing demand from countries undergoing intensive levels of urbanization and infrastructure building. In particular, China and India will drive up the cost of metals across the board.

Though it is highly likely that gold´s price will rise in 2012 substantially, 2011 showed that gold, long seen as a safe haven for investment, has a volatile side, falling to $1,500 in September. It may no longer be the guarantee in uncertain economic times that it traditionally has been. Who, after all, would have predicted the recent drop in the U.S. unemployment rate? Even though this only affected gold´s price adversely by 0.5% it goes to show that we really do not know what can happen.

If you want a great gold investment – buy Taseko Mines (TGB) a canadian gold mining company that is going to pop in Oct/Nov following provinical approval for what will be the biggest mine in Canada (prosperity). This will be a $10 stock by year end. Currently $4.30